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• 01 Sep

  Solving A Pay When Paid Concentration Limit Problem On An RPO Debtor

  Another success story regarding a client whom we were able to help overcome an invoice finance funding restriction.

  We have seen many issues with debtor concentrations, within the recruitment sector, that can be relaxed by comparing the funding levels between different providers. We had a case where a client needed help with the concentration limit on an RPO debtor, with whom they wanted to increase their trading levels.

  Concentration Limits

  However, they were being held back by their existing invoice finance company, which was not prepared to offer a sufficiently relaxed concentration limit, due to the presence of a "pay when paid" clause within the terms of the arrangement with the neutral vendor. There was no problem with the credit standing of the RPO, it was only the presence of this clause that was causing the financier to take a cautious approach to setting the debtor concentration limit.

  Pay When Paid Clauses

  A "pay, when paid" clause, means that the debtor is only obliged to pay their supplier after they have been paid by their end customer who sits up the supply chain. The problem with these clauses for invoice financiers is that they complicate the simplistic nature of the invoice by introducing an additional requirement, that must be satisfied, before getting paid.

  Debtor Concentration Limits

  The effect of a debtor concentration limit is to restrict the level of funding against a specific debtor, or the largest debtor (or debtors) on the sales ledger. The approach differs between invoice finance companies. For example, if you are receiving say a 90% prepayment against your invoices, you might expect to receive £90 when you raise an invoice for £100.

  This is not the case if the invoice is to a customer who is subject to a debtor concentration limit. If you had a limit of say 40%, the invoices that attract funding in respect of that customer are limited to 40% of the total value of sales invoices outstanding (on a sales ledger of £180, this would be £72). Therefore, if the balance on that customer amounted to say 50% of your sales ledger, the remaining 10% of invoicing (the portion above the concentration limit - £18 in our example - the difference between £90 and £72) would not attract any funding. In this way, funders can limit their exposure to funding prime debtor situations.

  More Flexible Funding

  In the case of our client, we were able to find them an alternative invoice finance company that was able to relax the debtor concentration limit and release c. 35% more flexible funding than their existing provider.

  If you are having a problem with a debtor concentration limit, please call us on 03330 113622, and let us see what we can do to help you find a funder who will take a more flexible alternative approach.

  By Glenn Blackman